Amazon starts collecting tax from California customers Saturday

Sept. 14, 2012

Updated Aug. 21, 2013 1:17 p.m.

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Reid Butler plays with his daughter Siena, 2, as they pose for photographs with recent online purchases from Amazon at their home in Walnut Creek on Thursday. Products are flying off the shelves at Amazon warehouses as Californians prepare for Amazon to start collecting taxes on online purchases. JEFF CHIU, AP

Reid Butler plays with his daughter Siena, 2, as they pose for photographs with recent online purchases from Amazon at their home in Walnut Creek on Thursday. Products are flying off the shelves at Amazon warehouses as Californians prepare for Amazon to start collecting taxes on online purchases. JEFF CHIU, AP

Spurred on by fanatically loyal shoppers such as Christine Dugger of Sacramento, e-commerce giant Amazon.com is doing something it spent years trying to avoid.

The move will erase some of the price advantage Amazon enjoys over brick-and-mortar stores. But it will allow Amazon to blanket the state with distribution centers – the better to speed orders to consumers such as Dugger.

"I get anywhere from two to four shipments a week," said Dugger, a new mom who shops Amazon exclusively for diapers, formula, sippy cups and other baby supplies.

With shoppers craving overnight and even same-day delivery, Amazon plans to build a network of warehouses, or fulfillment centers, in California. The first two will be in San Bernardino and Patterson.

Before the centers could open, the company had to make a deal with Gov. Jerry Brown. So it bowed to political pressure, supporting a law requiring Internet merchants to collect sales tax if they have a warehouse or other major physical presence in the state. The deal in 2011 included a one-year grace period set to end Saturday.

LAST-MINUTE RUSH

The deadline has spurred at least some consumers into impulse-buying mode, making big-ticket purchases and stocking up on essentials before the tax collection kicks in.

"Even the mailroom is laughing at me," said Derek Daniels, 37, who has had Amazon packages delivered to his Los Angeles office every day this week. He's loading up on household supplies like trash bags and collecting birthday and Christmas presents for his Superman-loving 2 year-old.

"We are hoping he won't fall in love with Batman by the time November rolls around," Daniels said.

The looming deadline prompted San Diego artist John Purlia to finally buy that Samsung flat-screen television that had been sitting in his Amazon shopping cart for months. He also picked up four CDs, an external hard drive and an oddly decorated $17.99 kitchen cutting-board – a gag gift for his sister.

"The TV was the motivating factor and the other stuff came along for the ride," said Purlia, 52. "I know I'm going to be back at Amazon before Saturday looking to take advantage of this. It's like the final days of a sale."

Technically, Purlia and Daniels owe taxes on all of this: California residents are supposed to calculate their obligation and send it directly to the state. But fewer than 1 percent do, according to the Franchise Tax Board.

Lawmakers have long complained that the increasingly popular e-retailer was depriving the state of millions of dollars by refusing to charge taxes at checkout. But Amazon said it was shielded by a 1992 U.S. Supreme Court ruling that prohibits states from forcing businesses without a physical presence in the area to collect sales tax.

TRADING TAXES FOR WAREHOUSES

The e-commerce giant said it did not have a physical presence in California because it does not have warehouses or other buildings here. In the deal it finally made with California legislators, Amazon essentially traded taxes for warehouse space.

"They've taken a pretty calculated approach," said Scot Wingo, chief executive of e-commerce technology company ChannelAdvisor. "It's worth it to bite the bullet, collect the taxes (and) get a fulfillment center within a day of L.A., Sacramento and San Francisco."

It's doubtful that other online merchants will start collecting when the law takes effect Saturday. They maintain they don't have a physical presence in California.

Amazon, more than other Internet retailers, is in a rush to build warehouses.

That's true outside California, too, prompting Amazon to give ground on the tax issue in multiple states. The company still drives a hard bargain where it can, but is gradually conceding that the era of Internet sales tax is at hand.

In Texas, Amazon closed a Dallas-area warehouse last year rather than collect sales tax. But two months ago, it started collecting the tax and promised to create 2,500 jobs over four years.

In South Carolina, the company agreed to build two warehouses after being granted a five-year tax holiday. After lawmakers killed the deal last year, Amazon halted construction – until the Legislature reversed course.

Amazon is also lobbying Congress in support of a nationwide law that would give states clear authority to tax Internet sales.

Amazon realized it was losing the political battle over taxes and "turned this into a strategic advantage," said Bryan Gildenberg, an e-commerce analyst with Boston consultant Kantar Retail.

"Kudos to Amazon for making a really good lemonade out of this brand of lemons," he said.

Amazon will open at least eight fulfillment centers in the United States this fall, including one in San Bernardino, expanding its distribution capacity by around 25 percent. The Patterson facility opens next spring.

The company offers same-day delivery in 10 U.S. cities, like New York and Chicago. Wingo said same-day service likely will come to the San Francisco Bay Area and Southern California once San Bernardino and Patterson are operational. Sacramento is less certain.

–The Sacramento Bee and The Associated Press contributed to this report.

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